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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 2000 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_______________.
Commission file number: 0-24784
PINNACLE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 94-3003809
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
280 North Bernardo, Mountain View, CA 94043
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (650) 526-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
- ------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.|_|
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
September 13, 1999 as reported on the Nasdaq National Market System, was
approximately $586,513,116. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of September 13, 2000, registrant had outstanding
50,798,641 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held October 30, 2000.
PART I
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: the Company's ability to manage growth; the
risks associated with successfully integrating acquired businesses; the risks
associated with dependence on resellers, contract manufacturers and other
third-party relationships; the uncertainty of continued market acceptance of
professional video products; significant fluctuations in the Company's operating
results; the historical absence of backlog; the Company's highly competitive
industry and rapid technological change within the Company's industry; the risks
associated with development and introduction of new products; the need to manage
product transitions; the risks associated with product defects and reliability
problems; the risks associated with single source suppliers; the uncertainty of
patent and proprietary technology protection and reliance on technology licensed
from third parties; the risks of third party claims of infringement; the
Company's dependence on retention and attraction of key employees; the risks
associated with future acquisitions; the risks associated with international
licensing and operations; general economic and business conditions; and other
factors referenced in this Report.
ITEM 1. BUSINESS
Pinnacle Systems, Inc. (the "Company") is a supplier of video
authoring, storage, distribution and Internet streaming solutions for
broadcasters, business and professional "desktop" users, and consumers.
Pinnacle's products are used to create, store, and distribute video content from
television programs, TV commercials, pay-per-view, sports videos, corporate
films to home movies. In addition, Pinnacle's products are increasingly being
used to stream video over the Internet. Expanding distribution channels
including cable television, direct satellite broadcast, video-on-demand, digital
video disks (DVD) and the Internet have led to a rapid increase in demand for
video content. This increasing demand for content to supply new and existing
distribution channels is driving a need for affordable, easy-to-use video
creation, storage, distribution and streaming tools.
The Company's products use real time video processing and editing
technologies to apply a variety of video post-production and on-air functions to
multiple streams of live or recorded video material. These editing applications
include the addition of special effects, graphics and titles. To address the
broadcast market, the Company offers high performance, specialized computer
based solutions for high-end, production, post-production, team sports analysis,
broadcast on-air and Internet streaming applications. For the desktop market,
the Company provides computer based video editing and media creation products,
products used to create video content and solutions used to stream live and
recorded video over the Internet. To address the consumer market, the Company
offers low cost, easy to use video editing and viewing solutions that allow
consumers to view TV on their computer and to edit their home videos using a
personal computer, camcorder and VCR. Many of the Company's consumer products
enable content to be created that is suitable for the Internet.
Industry Background
The development of a video program involves three distinct processes:
pre-production, which involves planning and preparation for the recording of the
video program; production, which involves the
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acquisition of video material (shooting); and post-production, which involves
the organization of raw video segments acquired in the production phase into a
cohesive and appealing program (editing). During the post-production phase,
elements such as titles, graphics, and transitions between video segments are
incorporated to enhance the overall quality and impact of a video program.
Historically, the video production industry has focused on providing
program material for broadcast television and advertising. To create high
quality video programs, producers have traditionally used expensive, dedicated
video production equipment linked together in a complex interconnected system to
form a "video-editing suite." Typical editing suites incorporate video
recorders, switchers, digital video affects systems, still image management
systems, character generators, electronic paint systems and other products,
often provided by multiple manufacturers. These editing suites require highly
skilled personnel to operate and maintain.
Recently, new and expanding channels of video content distribution,
including cable television, direct satellite broadcast, video rentals, CD-ROM,
DVD, video-on-demand, and now the Internet, have led to a rapid increase in
demand for video content for a wide variety of applications. This demand has
driven the market for editing approaches that are less expensive and easier to
use. New commercial and industrial applications for this market include
multimedia entertainment, video games, music videos, special event videos,
education and training and corporate communications. In addition, the popularity
of camcorders, VCRs and personal computers has fueled the growth of an emerging
consumer market for low cost video production technology that enables consumers
to create and edit home videos. These expanding channels of video content
distribution and new applications are increasing the demand for video content
production and distribution tools.
Computer-based video solutions combining personal computers with
specialized video processing technology can now provide video quality comparable
to that of traditional editing suites at significantly lower cost. As a result,
these computer-based video solutions are replacing the traditional editing
suites. In addition, such solutions are often easier to use since they
incorporate common graphical user interfaces. The lower cost and ease of use of
computer-based video tools enable large numbers of creative individuals,
previously untrained in video production, to produce professional quality video
programming. This programming can be used in traditional ways, such as
broadcasting over the air, via satellite, or used in homes and businesses, and
now the Internet provides entirely new channels and ways of communicating
through the use of video.
With the widening deployment of broadband networks, video on the
Interet has expanded tremendously. The use of the Internet has already enjoyed
remarkable growth. The Internet has rapidly transitioned from text to still
images and now to video, as users demonstrate an appetite for more information,
presented in more persuasive and powerful ways. Video on the Internet is
fundamentally different than television. Broadcast, cable and satellite delivery
systems are ideal for reaching very broad markets, delivering content with mass
appeal. Video over the Internet represents a basic shift in how we can
communicate by providing the ability to affordably reach narrow targeted
markets, anywhere in the world. Streaming video on the Internet is still in its
infancy, but as broadband capability expands, these limitations should diminish,
and the ability to create, store, stream and display high-quality video on the
web will be an essential element for high-quality communications and
entertainment.
The Pinnacle Approach
The Company designs, manufactures, markets and supports computer-based
video products to serve the broadcast, desktop and consumer markets. The
Company's products are based on its proprietary software and hardware
technologies that offer the following benefits:
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Sophisticated Video Processing. Pinnacle's products provide advanced
video processing and manipulation capabilities, such as the creation and
addition of special effects, graphics and titles. Videographers constantly seek
effects to give their programs a new look and to allow them to differentiate and
enhance their end product.
Real Time Interactivity. Pinnacle's products allow users to create
video productions in real time. This real time interactivity gives users the
flexibility to try many different effects and fine-tune the resulting content.
Open Systems. Pinnacle's products conform to generally accepted
industry standards for video input/output and control, allowing interoperability
with a wide variety of video processing and storage equipment. Furthermore, the
Company has developed and published, and is encouraging others to adopt, open
interface specifications for computer-based video post-production products.
These specifications include video input/output, manipulation and control.
Ease of Use. Pinnacle's products include menu-driven interfaces for
selecting and controlling the various video manipulation functions. This reduces
technical obstacles to the operation of the system, permitting the user to focus
on the artistic aspects of the post-production process.
Favorable Price/Performance Ratio. Pinnacle's products have a favorable
price to performance ratio, in part because the Company uses the same
proprietary components across its product lines. The Company intends to continue
lowering the cost of its products by further integrating its video manipulation
and video capture technologies into application specific integrated circuits
("ASICs").
Operating Structure. The Company is organized into three separate
business groups to serve the broadcast, desktop and consumer markets. The
Company believes this organizational structure enables it to effectively address
varying product requirements, rapidly implement its core technologies,
efficiently manage different distribution channels and anticipate and respond to
changes in each of these markets.
Company Strategy
Pinnacle's goal is to take advantage of the growing traditional and
Internet video opportunities and become the leading supplier of solutions for
the creation, storage, streaming and viewing of video for a wide variety of
purposes and applications. As broadband capability continues to increase, the
need to create, store, stream and view high-quality video becomes more urgent.
Pinnacle Systems has a proven ability to successfully migrate technology
developed for broadcasters down to the desktop and even the consumer markets,
and is now moving aggressively toward web based solutions in each of its
businesses. To pursue its goal, the Company intends to implement the following
strategies:
Expand and Leverage Core Technologies. The Company intends to expand
its core software and hardware technological base through both internal
development and acquisitions. The Company uses a modular approach to product
development. This allows it to leverage its investment in research and
development across multiple product designs and minimize time to market.
Establish an Industry Standard Video Processing Platform. The Company
believes that as the desktop market continues to move toward an open
architecture environment, companies will either provide an open architecture
video-processing platform or develop end user editing applications. The
Company's strategy is to establish an industry standard video-processing
platform compatible
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with a broad range of applications. The platform technology combines real time
video manipulation, video capture technology and a unified API.
Develop and Expand Worldwide Sales and Distribution Organization. The
Company's sales organization focuses on a variety of distribution channels,
including OEMs, value-added resellers, distributors, retail stores and other
resellers. The Company believes that its development of a worldwide sales and
distribution organization gives it a strategic advantage in the rapidly changing
video post-production industry. The Company intends to persist in strengthening
and developing this organization and to continue to develop strong strategic
relationships with key OEMs and resellers.
Acquire Complementary Businesses, Products and Technologies. The
Company has grown and intends to continue to grow both internally as well as
through the acquisition of complementary businesses, product lines or
technologies. The Company frequently evaluates strategic acquisition
opportunities that could enhance the Company's existing product offerings or
provide an avenue for developing new complementary product lines. The Company
believes that the video production industry is in a period of consolidation and
that strategic acquisition opportunities may arise. For example, in August 1999,
the Company completed the acquisition of certain assets of the Video
Communications Division of the Hewlett-Packard Company. The HP business was
integrated with Pinnacle's video server group to provide a broad and powerful
suite of video server solutions for traditional broadcast and Internet
applications. In March 2000 the Company acquired Puffin Designs, Inc. which
provides an extended suite of video software applications, and combined with
Pinnacle's titling, character generator and graphics applications, allows the
Company to offer a very powerful and complete set of software tools that further
enhance the Company's leading position in video content creation. In March 2000
and June 2000, the Company acquired Digital Editing Services, Inc. and Avid
Sports, Inc., respectively, adding technology and software related to sports
editing, and in April 2000, the Company acquired the Montage Group, a leading
supplier of news editing systems to the broadcast market.
Products
The Company's products are designed to provide computer-based creation,
streaming, storage and viewing products for broadcasters, professional "desktop"
users and consumers.
Broadcast Market
For the broadcast market, the Company currently offers products that
provide systems solutions to broadcasters. This includes products that provide
real time digital effects, still image management and storage, and real time
video character generation. Pinnacle also sells digital video servers for on-air
video content distribution. These products generally include proprietary
hardware and software and specialized control surfaces for rapid execution,
especially for on-air applications. The primary broadcast products sold during
fiscal 2000 were the DVExtreme, Lightning, Deko and Thunder and the Media Stream
family of products. In addition, the Company sells BroadNet solutions, which is
a network technology that enables the Company's broadcast products to be
networked together for easy interoperability, and to exchange information
through the Internet. In August 1999, the Company completed the acquisition of
certain assets of the Video Communications Division of the Hewlett-Packard
Company. The acquisition included key technologies, intellectual property, the
MediaStream server family of products as well as most managers and employees
from that division. The MediaSteam server family complements the Company's
Thunder family, to provide a more complete line of broadcast quality
video-server solutions. In March 2000 and in June 2000, the Company acquired DES
and Avid Sports, respectively. These companies supply sports editing software
used by professional and school teams around the world. Combined, these
businesses give Pinnacle a leading position in this important video market. In
April 2000, the Company acquired the Montage Group, a leading supplier of news
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editing systems to the broadcast market. In April 2000, the Company announced
the PDS9000, which is a new digital video production switcher for live on-air
broadcasts.
DVExtreme Family. DVExtreme is the Company's high performance, real
time digital video effects system for broadcast and high-end, post-production
customers which seek to incorporate unique special effects into their
programming. DVExtreme, a Windows NT-based, multi-channel system, can
simultaneously manipulate up to three channels of live video and can generate
real time effects such as four-corner page peels and turns, highlights and
shadows, water ripples, ball effects, wave patterns and other visual effects.
The suggested list price for a DVEtreme ranges from $44,990 to $63,990,
depending on the configuration.
Lightning Family. Lightning is the Company's high performance,
networkable image management system designed for broadcast and high-end,
post-production applications such as news and sports programs. Lightning is a
Windows NT-based system that can accommodate up to three channels of video, plus
additional virtual channels for previewing. It has internal storage capacity for
over 10,000 images, and an interface to external disks for expanded capacity.
Lightning can also perform digital video effects on captured video images. The
suggested list price for a Lightning ranges from $25,990 to $31,780, depending
on the configuration.
Deko Family. The Deko family of products is designed to provide high
performance titling, real time effects and character generation for broadcast
and on-air applications. Deko is a Windows NT-based system that includes
powerful text and graphics tools such as real time text scrolling, text
manipulation, font enhancement, multiple layers for text composition and
supports a wide range of standard and international character fonts. The
suggested list price for a Deko ranges from $26,900 to $31,900, depending on the
configuration.
Thunder Family. The Thunder family of digital video servers is designed
to record, store, retrieve and process digital video content for broadcast over
conventional mediums or the Internet. The Thunder server family currently
includes the four-channel Thunder MCS 4000 server, the two-channel MCS 2000
server, and iThunder. Thunder uses MPEG-2 and native DV video formats. Thunder's
on-air application offers sophisticated asset management capabilities for
identifying clips, transitions and stills and sequencing their play-out to air.
By pairing the Thunder system with its Internet companion, iThunder, clips and
programs can be instantly 'broadcast' over the World Wide Web. Through the
iThunder HTML browser, remote Internet users can access and view video proxies
via standard streaming technologies directly from their remote desktop location.
The suggested list prices range from $11,000 to $69,000, depending on
configuration.
Media Stream Server Family. The Media Stream digital video server is
designed to record, store, retrieve and process digital video content for
broadcast over conventional mediums or the Internet. The Media Stream servers
can handle up to 16 channels of MPEG-2 I/O. It includes a RAID disk expansion
chassis that can be expanded to provide over 1000 hours of online storage. The
RAIDs are protected with hot swappable power supplies and the entire system can
be networked with high-speed Fibre channel to allow multiple servers to access
the same content. The suggested list prices range from $11,000 to $69,000.
PDS9000 Digital Video Switcher Family. The PDS 9000 family provides
real time image processing for live on-air products. It includes nine integrated
3D digital effects systems, real time color correction, and is Broadnet
compliant to provide the abilitiy to share graphic images over the Internet. The
PDS9000 began production shipments in September 2000, and has a suggested list
prices range from $89,000 to $110,000, depending on configuration.
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Desktop Market
The Company's desktop products are designed to provide video
professionals tools to create high quality digital video productions and to
distribute those products in the form of video tape, CD or DVD, or over the
Internet. The Company has two general classes of desktop products: video
creation and streaming products. The creation products allow users to create
professional video productions and include the Alladin and Genie family of
DVE's, the Reeltime family, DC30, DC50, DV500, DVD 2000 and the TARGA family of
products. The streaming products allow users to send or "stream" live or
previously recorded material over the internet and include the StreamGenie which
is used to broadcast live events over the internet, and the StreamFactory, which
encodes and streams previously recorded video content over the internet.
The Company sells its desktop products through professional video
dealers and through OEM arrangements. The primary OEM products are Genie and the
TARGA family of products. OEM's who choose the TARGA family have a wide
selection of configuration options to choose from. These options range from the
TARGA 3200 with dual channel video capture, quad DVCPRO 50 decompression and 24
channel audio mixing, to less expensive versions without hardware codecs or
audio DSP. A key competitive advantage of the Targa products is the robust
real-time API written specifically for the TARGA 3000 family called CODI. The
Company publishes an extensive software developers kit (SDK) for CODI and
supports OEM and other developers through a dedicated Developer Services Group.
Alladin and Genie Family. The Genie family of products offers a
complete set of professional quality, real time 3D digital effects, switching,
character generation, paint and still storage on a single personal computer
interface ("PCI") board. While offering much of the functionality of Alladin,
Genie does so at a much lower price point and is installed inside the computer
rather than through an external port. GeniePlus integrates into linear desktop
editing environments and includes input/output and software allowing the user to
process up to two simultaneous streams of live video. In addition, a non-linear
version of Genie is sold to OEM vendors who integrate and sell it with their
non-linear editing products. A custom version of the GeniePlus is a key
component of the Company's StreamGenie webcasting system. The suggested list
price for a Genie is $5,990.
ReelTime and ReeltimeNitro Family. ReelTime is a dual stream video and
audio capture and playback card with real time special effects. ReelTime
supports the Adobe Premiere editing software and additionally, ReelTime's open
architecture is intended to support a wide variety of third-party video
applications. ReelTime features real time transitions, along with real time
chroma, luma and linear keying, titling, and a scalable architecture that
supports the Company's Genie RT option. The Genie RT option incorporates the
Pinnacle Genie add-in card and enables picture-in-picture motion and real time
3D effects, including page turns, ripples, spheres and hourglasses. This
combined product has been named ReeltimeNitro. The suggested list price for
Reeltime is $4,990 for an NTSC version and $5,990 for a PAL version.
ReeltimeNitro lists for between $7,990 and $8,990.
DC/DV Family. The DC/DV family of products is comprised of complete
non-linear video and audio editing systems for professional videographers. These
products include the DC 30, DC50, DV200, DV300, and DV500 product lines. The
various products in this family consist of PCI-bus video capture and compression
cards bundled with Adobe Premiere editing software. Different members of the
DC/DV product line offer different combinations of composite video input/output,
component video input/output, 1394 digital video input/output, and audio
input/output. All targeted at the professional videographer products in the
DC/DV family of video editing solutions are based on either the motion-JPEG,
MPEG-2 or DV video compression/decompression standards. Some products in the
DC/DV product family offer dual-stream playback with simultaneous real-time
video effects. Products in the DC/DV family range in price from $499 to $1,999.
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DVD Family. The DVD 2000 is a professional quality video encoding and
editing solution with real-time editing and DVD output capabilities. It combines
frame accurate dual stream MPEG-2 video editing and DVD authoring. The DVD2000
is designed for corporate, event, and professional digital video artists who
create marketing presentations, product demonstrations, training, entertainment,
or educational DVDs. The dual stream nature of the product allows higher
productivity by reducing the need to render video segments to finish a
production. The product uses Pinnacle's "Smart GOP" MPEG-2 technology, and is
capable of real time processing of titles and transitions, including more than
300 real time video effects. The suggested list price is $9,990.
The TARGA Family. In April 2000, the Company introduced TARGA 3000 and
Targa Cine products based on the memory-centric HUB3 architecture, a
Pinnacle-designed technology for very high bandwidth video processing. The TARGA
products are designed to power the next generation of non-linear video and audio
editing solutions targeted at professional videographers and digital content
creation applications. These new TARGA products can support uncompressed video
processing, multiple codec formats such as DV and MPEG2, variable picture
resolutions and aspect ratios for both standard definition and high definition
television, variable frame rates, and very high precision color processing in
both YUB and RGB. The first retail model in the TARGA 3000 family is the TARGA
3100 single-slot PCI card. TARGA 3100 is capable of realtime wipes, dissolves,
color correction, scaling, keying and compositing of up to three streams of
uncompressed video with up to seven full-color graphics streams. The TARGA 3100
comes bundled with Adobe Premiere for non-linear editing, augmented with custom
Pinnacle software for real time performance, a critical competitive advantage.
List price is $6995 for a basic system. Targa Cine is designed for the Apple
Macintosh platform and comes bundled with Pinnacle's Commotion Pro and Hollywod
FX software packages. The combination of the TARGA Cine engine and these three
software applications all working together under the QuickTime API will be
marketed as CineWave, the next wave in digital cinema. CineWave is targeted at
digital cinematographers, broadcast designers, post-production specialists,
webcasters and special effects artists, as well as the large community of video
and multimedia producers working exclusively on the Macintosh platform. The
products require professional audio/video tools at an affordable price. The
CineWave system has a list price of $7995 for standard definition. High
definition systems, including the computer and a modest amount of storage, start
as low as $30,000, a price low enough to change the economic model of high
definition post-production and stimulate the wider adoption of these advanced
digital video formats.
StreamGenie Family. The Stream Genie is designed to broadcast live
events over the internet. It is a portable internet broadcast station in a box
and supports multiple camera switching, simultaneous output for the Internet and
video archiving, integrated professional titling, graphics, 3-D video effects,
pro-audio and built-in network I/O. StreamGenie is ideally suited for webcasting
corporate events, distance learning, conferences and concerts in both Real
Networks SureStream and Microsoft Windows Media formats. StreamGenie is more
versatile, more powerful, better integrated, more compact, less expensive and
easier to use than competitive products. List price ranges from $19,995 to
$24,995 depending on system configuration.
StreamFactory. The StreamFactory is a real-time web stream encoder that
accepts professional video and audio inputs. StreamFactory supports multiple
data rate output in either Microsoft Windows Media or Real Networks SureStream
formats. Designed to be a rack-mounted realtime streaming encoder, StreamFactory
can be configured remotely, either from a LAN, or from across the country.
Simply connect a VTR, video camera, or other A/V source direct to StreamFactory
and convert to popular streaming formats in real-time. Pinnacle has designed
StreamFactory from the ground up expressly for the 24x7 demands of Internet
broadcasters. The StreamFactory was announced in April
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2000, but production units are not expected to begin shipping until November
2000. It is expected to have a suggested list price of approximately $10,000.
Consumer Market
The Company's consumer products allows consumers to edit their home
video to create a professional looking "home movie" using a personal computer
and camcorder. The Company has developed an easy to use software interface
called the Studio application, which serves as the primary interface for all of
the Studio products. The Company currently focuses on three Studio products:
Studio DV, Studio DC10 and Studio PCTV.
Studio DV. The Studio DV is a consumer non-linear editing system, which
uses DV technology. Video can be downloaded from a DV camcorder directly onto
the computer hard drive. With the use of the Studio software, users can "drop
and drag" video clips in the order they desire, add simple transitions between
scenes and simple graphic, titles and music or audio to the production. The
suggested list price for the Studio DV is $99.
Studio DC10. The Studio DC10 is a consumer non-linear editing system,
which uses JPEG compression technology. It allows the users to load their video
on to a computer hard drive using a single stream PCI-bus video product which
captures, compresses and decompresses video signals using a standard computer.
The suggested list price for the Studio DC10 is $99.
Studio PCTV. The Studio PCTV allows users to view television
programming on their computer monitor. The television program can be viewed
alone or while the user is working on the computer or surfing the internet. The
suggested list price is $99.
Technology
The Company is a technological leader in digital video processing,
which includes real time video manipulation, video capture, digital video
editing and storage. The National Academy of Television Arts and Sciences'
Outstanding Technical Achievement EMMY award has been awarded to Pinnacle on
three occasions. In 1990, the Company received an EMMY for pioneering the
concept of the video workstation. In 1994, the Company received an EMMY for
developing technology which allows real time mapping of live video onto animated
3D surfaces and, in 1997, the Company received an EMMY for utilization of real
time video manipulation technology in non-linear editing applications. In
addition, the technology that the Company acquired from Digital Graphix was
awarded two Emmy's prior to its acquisition by the Company.
Many of the Company's products share a common internal architecture.
This design approach allows the Company to leverage its research and development
expenditures by utilizing similar hardware and software modules in multiple
products. The Company's video manipulation architecture is fundamental to the
performance and capabilities of the Company's products. As a result of the
acquisition of Miro Computer Products AG in August 1997, the Company acquired
video capture technology which allows high quality live video and audio to be
captured and played back from a standard personal computer. This technology was
further developed within Pinnacle, and further augmented with the acquisition of
Truevision in March 1999.
All of the Company's products use or work with a standard personal
computer for control of video manipulation functions. In all products targeting
the broadcast market, the control microprocessor is embedded within the product.
The desktop and consumer products are inserted into or connect externally to a
personal computer. The use of industry standard microprocessors offers three
main
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advantages over traditional video products: lower software development costs due
to the availability of powerful off-the-shelf software development tools; lower
product manufacturing costs due to the low costs of standard microprocessors;
and the ability to integrate third party software such as networking or 3D
rendering software to provide additional functionality.
Essentially all real time video manipulation must be performed on
uncompressed video data. Since uncompressed digital video rates are too high to
be processed by a microprocessor in real time, video signals are internally
distributed over a separate high-speed digital video bus ("DVB") and processed
using the Company's proprietary real time video manipulation hardware. The video
data on the DVB is processed in the standard digital component format that fully
complies with the highest digital component video standards of the International
Radio Consultation Committee, an organization that develops and publishes
standards for international telecommunication systems.
The software in the Company's video capture and video manipulation
products is divided into two layers: the user interface application and the API.
The user interface application is different and has been optimized for each
product family. The API is, for the most part, common to most of the Company's
products and incorporates all the proprietary low level routines that allow the
Company's products to perform high quality, real time video manipulations. This
software architecture has three main advantages: real time video manipulation
algorithms that are complex and difficult to develop can be used in multiple
products; the user interface can be tailored to meet specific user requirements;
and applications can be quickly ported to the Company's products using the API.
The Company's core technical expertise is in real time digital video
processing, video capture technology, real time software algorithms, video
input/output, advanced user interfaces and software control of commercially
available camcorders and VCRs.
Real Time Digital Video Processing. The Company has devoted significant
resources to the development of proprietary technology for real time video
processing, including high-speed digital filters, image transformation buffers,
plane and perspective addressing, and non-linear image manipulation. The Company
has patented technology related to real time mapping of live video onto
multiple, complex, animated 3D shapes and surfaces. This technology includes a
proprietary data compression algorithm that compresses the address information
and allows decompression of this data in real time.
CODEC Technology. The Company has devoted significant resources to
developing and acquiring hardware and software for real time video capture. This
technology includes audio/video effect synchronization methodologies,
compression algorithms, drivers and software for real time playback from disks.
Real Time Software Algorithms. The digital video manipulation functions
of the Company's products use common core software that performs complex
computations in real time under user control. The Company has developed certain
algorithms that enable the high-speed computation of multiple complex equations
which are required for real time video effects.
Video Input/Output. The Company has developed technology for video
input and output of composite analog, component analog and component digital
video data streams. All of the Company's products work with NTSC and PAL video
standards. In addition, the Company has developed interfaces to support
input/output of video streams stored on computer disks.
10
User Interface Design. The Company has extensive experience in the
design of graphical user interfaces for video control and manipulation. The
Company uses interactive, menu-driven user interfaces to control video
manipulation functions.
Camcorder and VCR Control. With the acquisition of the VideoDirector
product line from Gold Disk, Inc. in June 1996, the Company obtained software
code which enables a computer to control most commercially available camcorders
and VCRs.
The Company has historically devoted a significant portion of its
resources to engineering and product development programs and expects to
continue to allocate significant resources to these efforts. In addition, the
Company has acquired certain products and technologies which have aided the
Company's ability to more rapidly develop and market new products. The Company's
future operating results will depend to a considerable extent on its ability to
continually develop, acquire, introduce and deliver new hardware and software
products that offer its customers additional features and enhanced performance
at competitive prices. Delays in the introduction or shipment of new or enhanced
products, the inability of the Company to timely develop and introduce such new
products, the failure of such products to gain market acceptance or problems
associated with product transitions could adversely affect the Company's
business, financial condition and results of operations, particularly on a
quarterly basis.
As of June 30, 2000, the Company had 162 people engaged in engineering
and product development. The Company's engineering and product development
expenses (excluding purchased in-process research and development) in fiscal
2000, 1999 and 1998 were $27.8 million, $16.1 million and $11.7 million
respectively, and represented 11.7%, 10.1% and 11.1%, respectively, of net
sales.
Customers
End users of the Company's products range from individuals to major
corporate and government entities, and to video production and broadcast
facilities worldwide. Broadcast customers include domestic and international
television and cable networks, local broadcasters and program creators. Desktop
customers include corporations seeking to develop internal video post-production
capabilities, professional videographers including those who cover weddings and
other special events, and small production houses serving cable and commercial
video markets.
Marketing, Sales and Service
Marketing
The Company's marketing efforts are targeted at users of broadcast and
desktop post-production suites, and home video editing enthusiasts. In order to
increase awareness of its products, the Company attends a number of trade shows,
the major ones being the National Association of Broadcasters ("NAB") show and
the COMDEX exhibition, both in the United States, and the International
Broadcasters Convention ("IBC") show and the CEBIT show in Europe. Pinnacle also
uses targeted direct mail campaigns and advertisements in trade and computer
publications for most of its product lines and also participates in joint
marketing activities with its OEM partners and other desktop video companies.
Sales
The Company maintains a sales organization consisting of regional sales
managers in the United States, Europe and other international territories. The
Company currently has sales offices in 9 countries
11
worldwide. The regional sales managers are primarily responsible for supporting
independent dealers and value added resellers (VARs) and making direct sales in
geographic regions without dealer coverage. They also service customers who
prefer to transact directly with the Company.
The Company sells its broadcast and desktop products to end users
through an established domestic and international network of independent video
product dealers and VARs in addition to direct sales. The independent dealers
and VARs are selected for their ability to provide effective field sales and
technical support to the Company's customers. Dealers and VARs carry the
Company's broadcast and desktop products as demonstration units, advise
customers on system configuration and installation and perform ongoing
post-sales customer support. The Company believes that many end users depend on
the technical support offered by these dealers in making product purchase
decisions. The Company continues to invest resources in developing and
supporting its network of independent dealers and VARs. These groups eagerly
promote the Company's products and considerably expand its market coverage.
The Company also sells and distributes its desktop products to OEMs
that incorporate the Company's products into their video editing products and
resell these products to other resellers and end users. These OEMs generally
purchase the Company's products and are responsible for conducting their own
marketing, sales and support activities. The Company attempts to identify and
align itself with OEMs that are market share and technology leaders in the
Company's target markets. In recent years the Company has been dependent on
sales of primarily Genie products to Avid Technologies, Inc. ("Avid") which is a
leading supplier of digital, non-linear video and audio editing systems for the
professional video and film editing market. However, sales to Avid as a
percentage of total Company sales has declined or remained flat during the last
three years. Sales to Avid accounted for approximately 7.3% of net sales in
fiscal 2000, 6.8% of net sales in fiscal 1999, 10.7% of net sales in fiscal
1998. Though the concentration of the net sales to a single OEM customer has
decreased substantially during the last three years, it still subjects the
Company to risks, in particular the risk that its operating results can vary on
a quarter-to-quarter basis as a result of variations in the ordering patterns of
OEM customers.
The Company's consumer or Studio products and certain lower priced
desktop products are sold primarily through the consumer retail channel via
large distributors, such as Ingram Micro Inc., and large computer and electronic
retailers in addition to direct telemarketing, mail order and over the Internet.
The consumer retail channel is characterized by long payment terms and sales
returns. There can be no assurance that any particular computer retailers will
continue to stock and sell the Company's consumer products. If a significant
number of computer retailers were to discontinue selling those products or if
sales returns are higher than anticipated, the Company's results of operations
would be adversely affected. Sales into the consumer retail channel entail a
number of risks including the limited experience of the Company in this market,
inventory obsolescence, product returns and potential price protection
obligations.
Sales outside of North America represented approximately 55.0%, 60.8%,
57.6% of the Company's net sales for fiscal 2000, 1999, and 1998, respectively.
The Company expects that sales outside of the United States will continue to
account for a significant portion of its net sales. The Company makes foreign
currency denominated sales in many countries, especially in Europe, exposing
itself to risks associated with foreign currency fluctuations, though this risk
is partially hedged since all local selling and marketing expenses are also
denominated in those same currencies. International sales and operations may
also be subject to risks such as the imposition of governmental controls, export
license requirements, restrictions on the export of critical technology,
political instability, trade restrictions, changes in tariffs, difficulties in
staffing and managing international operations, potential insolvency of
international dealers and difficulty in collecting accounts receivable. There
12
can be no assurance that these factors will not have an adverse effect on the
Company's future international sales and, consequently, on the Company's
business, financial condition and results of operations.
Service and Support
The Company believes that its ability to provide customer service and
support is an important element in the marketing of its products. Its customer
service and support operation also provides the Company with a means of
understanding customer requirements for future product enhancements. The Company
maintains an in-house repair facility and also provides telephone access to its
technical support staff. The Company's technical support engineers not only
provide assistance in diagnosing problems, but also work closely with customers
to address system integration issues and to assist customers in increasing the
efficiency and productivity of their systems. The Company supports its customers
in Europe and Asia primarily through its international sales offices, European
logistic center and local dealers.
The Company typically warrants its products against defects in
materials and workmanship for varying periods depending on the product and the
nature of the purchaser. The Company believes its warranties are similar to
those offered by other video production equipment suppliers. To date, the
Company has not encountered any significant product maintenance problems.
Competition
The video production equipment market is highly competitive and is
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over the
life of a product. Competition is fragmented with several hundred manufacturers
supplying a variety of products to this market. The Company anticipates
increased competition in the video post-production equipment market from both
existing manufacturers and new market entrants. Increased competition could
result in price reductions, reduced margins and loss of market share, any of
which could materially and adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete successfully against current and future competitors.
Competition for the Company's broadcast products is generally based on
product performance, breadth of product line, service and support, market
presence and price. The Company's principal competitors in this market include
Chyron Corporation, Leitch Technology Corporation, Matsushita Electric
Industrial Co. Ltd. ("Matsushita"), Quantel Ltd. (a division of Carlton
Communications Plc) SeaChange Corporation, Sony Corporation ("Sony"), and
Tektronix Inc., some of whom have greater financial, technical, marketing, sales
and customer support resources, greater name recognition and larger installed
customer bases than the Company. In addition, some of these companies have
established relationships with current and potential customers of the Company.
Some of the Company's competitors also offer a wide variety of video equipment,
including professional video tape recorders, video cameras and other related
equipment. In some cases, these competitors may have a competitive advantage
based upon their ability to bundle their equipment in certain large system
sales.
The Company's competition in the desktop and consumer markets comes
from a number of groups of video companies such as traditional video equipment
suppliers, providers of desktop editing solutions, video software application
companies and others. Suppliers of traditional video equipment such as
Matsushita and Sony have the financial resources and technical know-how to
develop high quality, real time video manipulation products for the desktop
video market. Suppliers
13
of desktop video editing systems or components such as Avid, Matrox Electronics
Systems, Ltd., Media100, Inc., have established desktop video distribution
channels, experience in marketing video products and significant financial
resources.
The Company believes that the consumer video editing market is still
emerging and as well the sources of competition. There are several established
video companies that are currently offering products or solutions that compete
directly or indirectly with the Company's consumer products by providing some or
all of the same features and video editing capabilities. In addition, the
Company expects that existing manufacturers and new market entrants will develop
new, higher performance, lower cost consumer video products that may compete
directly with the Company's consumer products. The Company may also face
competition from other computer companies that lack experience in the video
production industry but that have substantial resources to acquire or develop
technology and products for the video production market. There can be no
assurance that any of these companies will not enter into the video production
market or that the Company could successfully compete against them if they did.
Manufacturing and Suppliers
The Company's manufacturing and logistics operations, located in
Mountain View, California and Braunschweig, Germany, consist primarily of
testing printed circuit assemblies, final product assembly, configuration and
testing, quality assurance and shipping for the Company's broadcast and desktop
products. Manufacturing of the Company's consumer and desktop products is
performed by independent subcontractors from where products are often shipped
directly to the distributor or retailer. Each of the Company's products
undergoes quality inspection and testing at the board level and final assembly
stage. The Company manages its materials with a software system that integrates
purchasing, inventory control and cost accounting.
The Company relies on independent subcontractors who manufacture to the
Company's specifications its consumer and certain desktop products and major
subassemblies used in the Company's broadcast and other desktop products. This
approach allows the Company to concentrate its manufacturing resources on areas
where it believes it can add the most value, such as product testing and final
assembly, and reduces the fixed costs of owning and operating a full scale
manufacturing facility. The Company has manufacturing agreements with a number
of U.S.-based subcontractors which include Pemstar, Flash Electronics and Sales
Link (formerly PacLink), for the manufacture of Company's consumer and desktop
products, and with Streiff & Helmold GmbH, which is located in Braunschweig,
Germany. The Company's reliance on subcontractors to manufacture products and
major subassemblies involves a number of significant risks including the loss of
control over the manufacturing process, the potential absence of adequate
capacity, the unavailability of or interruptions in access to certain process
technologies and reduced control over delivery schedules, manufacturing yields,
quality and costs. In the event that any significant subcontractor were to
become unable or unwilling to continue to manufacture these products or
subassemblies in required volumes, the Company's business, financial condition
and results of operations would be materially adversely affected.
To the extent possible, the Company and its manufacturing
subcontractors use standard parts and components available from multiple
vendors. However, the Company and its subcontractors are dependent upon single
or limited source suppliers for a number of key components and parts used in its
products, including integrated circuits manufactured by Altera Corporation,
AuraVision Corporation, C-Cube Microsystems, LSI Logic Corp., Maxim Integrated
Products, Inc., National Semiconductor Corporation, Philips Electronics, Inc.,
Raytheon Corporation and Zoran
14
Corporation, boards and modules manufactured by Adaptec, Inc., and Sony, field
programmable gate arrays manufactured by Altera Corporation, serial RAM memory
modules manufactured by Hitachi, Ltd. and software applications from Adobe. The
Company's manufacturing subcontractors generally purchase these single or
limited source components pursuant to purchase orders placed from time to time
in the ordinary course of business, do not carry significant inventories of
these components and have no guaranteed supply arrangements with such suppliers.
In addition, the availability of many of these components to the Company's
manufacturing subcontractors is dependent in part on the Company's ability to
provide its manufacturers, and their ability to provide suppliers, with accurate
forecasts of its future requirements. The Company and its manufacturing
subcontractors endeavor to maintain ongoing communication with their suppliers
to guard against interruptions in supply. The Company and its subcontractors
have in the past experienced delays in receiving adequate supplies of single
source components. Also, because of the reliance on these single or limited
source components, the Company may be subject to increases in component costs
which could have an adverse effect on the Company's results of operations. Any
extended interruption or reduction in the future supply of any key components
currently obtained from a single or limited source could have a significant
adverse effect on the Company's business, financial condition and results of
operations in any given period.
The Company's broadcast and desktop customers generally order on an
as-needed basis. The Company typically ships its products within 30 days of
receipt of an order, depending on customer requirements, although certain
customers, including OEMs, may place substantial orders with the expectation
that shipments will be staged over several months. A substantial majority of
product shipments in a period relate to orders received in that period, and
accordingly, the Company generally operates with a limited backlog of orders.
The absence of a significant historical backlog means that quarterly results are
difficult to predict and delays in product delivery and in the closing of sales
near the end of a quarter can cause quarterly revenues to fall below anticipated
levels. In addition, customers may cancel or reschedule orders without
significant penalty and the prices of products may be adjusted between the time
the purchase order is booked into backlog and the time the product is shipped to
the customer. As a result of these factors, the Company believes that the
backlog of orders as of any particular date is not necessarily indicative of the
Company's actual sales for any future period.
Proprietary Rights and Licenses
The Company's ability to compete successfully and achieve future
revenue and profit growth will depend, in part, on its ability to protect its
proprietary technology and operate without infringing the rights of others. The
Company relies on a combination of patent, copyright, trademark and trade secret
laws and other intellectual property protection methods to protect its
proprietary technology. In addition, the Company generally enters into
confidentiality and nondisclosure agreements with its employees and OEM
customers and limits access to and distribution of its proprietary technology.
The Company currently holds a number of United States patents covering certain
aspects of its technologies. Although the Company intends to pursue a policy of
obtaining patents for appropriate inventions, the Company believes that the
success of its business will depend primarily on the innovative skills,
technical expertise and marketing abilities of its personnel, rather than upon
the ownership of patents. Certain technology used in the Company's products is
licensed from third parties on a royalty-bearing basis. Such royalties to date
have not been, and are not expected to be, material. Generally, such agreements
grant to the Company nonexclusive, worldwide rights with respect to the subject
technology and terminate only upon a material breach by the Company.
In the course of its business, the Company may receive and in the past
has received communications asserting that the Company's products infringe
patents or other intellectual property rights of third parties.
15
The Company's policy is to investigate the factual basis of such
communications and to negotiate licenses where appropriate. While it may be
necessary or desirable in the future to obtain licenses relating to one or more
of its products, or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms or at all. There can be no assurance that such communications can be
settled on commercially reasonable terms or that they will not result in
protracted and costly litigation.
There has been substantial industry litigation regarding patent,
trademark and other intellectual property rights involving technology companies.
In the future, litigation may be necessary to enforce any patents issued to the
Company, to protect its trade secrets, trademarks and other intellectual
property rights owned by the Company, or to defend the Company against claimed
infringement. Any such litigation could be costly and a diversion of
management's attention, either of which could have material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ITEM 2. PROPERTIES
The Company's principal administrative, marketing, manufacturing and
product development facility is located in Mountain View, California. This
facility occupies approximately 106,000 square feet pursuant to a lease which
commenced August 15, 1996 and which will terminate December 31, 2003.
The Company also leases space in Braunschweig, Germany which houses
engineering, administrative, logistics and marketing operations for the
Company's consumer and desktop products. The Braunschweig lease expires in April
2004. The Company also houses certain engineering and support operations in
Indianapolis, Indiana and Paramus, New Jersey.
Additionally, the Company leases facilities in Lowell, Massachusetts
and Orlando, Florida, which house operations for the Company's recently acquired
sports businesses.
The Company also maintains sales and marketing support offices in
leased facilities in various other locations throughout the world.
ITEM 3. LEGAL PROCEEDINGS
On July 18, 2000, a lawsuit entitled Jiminez v. Pinnacle Systems, Inc.
et al., No. 00-CV-2596 was filed in the United States District Court for the
Northern District of California against the Company and certain officer and
director defendants. The action is a putative class action and alleges that
defendants violated the federal securities laws by making false and misleading
statements concerning the Company's business prospects during an alleged class
period of April 18, 2000 through July 10, 2000. The Complaint does not specify
damages. The Company intends to defend the case vigorously.
We are engaged in other legal actions arising in the ordinary course of
business. We believe we have adequate legal defenses and that the ultimate
outcome of these actions will not have a material effect on our financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
16
Not Applicable.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- --------
Mark L. Sanders.................. 57 President, Chief Executive Officer and Director
Ajay Chopra...................... 43 Chairman of the Board, Vice President, General Manager, Desktop Products
Arthur D. Chadwick............... 43 Vice President, Finance and Administration and Chief Financial Officer
Georg Blinn...................... 54 Vice President, General Manager, Pinnacle Systems GmbH
James E. Dunn.................... 55 Vice President, Consumer Marketing and Sales, Americas
William Loesch................... 46 Vice President, General Manager, Consumer Products
Robert Wilson.................... 46 Vice President, General Manager, Broadcast Products
There is no family relationship between any director or executive
officer of the Company.
Mr. Sanders has served as President, Chief Executive Officer and a
director of the Company since January 1990.
Mr. Chopra, a founder of the Company, has served as Chairman of the
Board of Directors since January 1990, and has served as a director of the
Company since its inception in May 1986. Mr. Chopra has served as Vice
President, General Manager, Desktop Products since April 1997. He previously
served as Chief Technology Officer from June 1996 to April 1997, Vice President
of Engineering from January 1990 to June 1996, and President and Chief Executive
Officer of the Company from its inception to January 1990.
Mr. Chadwick has served as Vice President, Finance and Administration
and Chief Financial Officer of the Company since January 1989.
Mr. Blinn has served as Vice President, General Manager, Pinnacle
Systems GmbH since August 1997. Prior to joining the Company, Mr. Blinn was the
Chief Financial Officer of Miro AG, a provider of video capture cards, from
December 1996 to August 1997. From January 1993 to December 1996, Mr. Blinn was
an independent business consultant.
Mr. Dunn has served as Vice President, Business and Consumer Marketing
and Sales, Americas, since August 1999. From August 1996 to May 1999, Mr. Dunn
served as Chief Operating Officer of the Automotive Performance Group, an
automotive aftermarket marketing and distribution company. From April 1988 to
February 1996, Mr. Dunn served as the Director of Business and Government
Marketing for Apple Computer, Inc., a computer manufacturer.
Mr. Loesch has served as Vice President, General Manager, Consumer
Products since April 1997. Prior to that Mr. Loesch served as Vice President,
New Business Development of the Company from May 1994 to April 1997.
17
Mr. Wilson has served as Vice President, Broadcast Products since April
1997. From May 1994 to April 1997, Mr. Wilson served as Executive Vice
President, Chief Operating Officer and Chief Financial Officer of Accom, Inc., a
video company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pinnacle Systems made its initial public offering on November 8, 1994.
Its Common Stock is traded on the Nasdaq National Market under the symbol PCLE.
The following table sets forth for the fiscal periods indicated the range of
high and low sales prices per share of the common stock as reported on the
Nasdaq National Market.
- ------------------------------------ ---------------------- -------------------
High Low
- ------------------------------------ ---------------------- -------------------
Fiscal Year Ended June 30, 2000
- ------------------------------------ ---------------------- -------------------
First Quarter................. 21.190 13.000
- ------------------------------------ ---------------------- -------------------
Second Quarter................ 23.000 12.940
- ------------------------------------ ---------------------- -------------------
Third Quarter................. 35.500 19.000
- ------------------------------------ ---------------------- -------------------
Fourth Quarter................ 31.438 18.438
- ------------------------------------ ---------------------- -------------------
- ------------------------------------ ---------------------- -------------------
Fiscal Year Ended June 30, 1999
- ------------------------------------ ---------------------- -------------------
First Quarter................. 9.563 4.641
- ------------------------------------ ---------------------- -------------------
Second Quarter................ 9.563 4.750
- ------------------------------------ ---------------------- -------------------
Third Quarter................. 11.813 8.047
- ------------------------------------ ---------------------- -------------------
Fourth Quarter................ 16.938 10.125
- ------------------------------------ ---------------------- -------------------
- ------------------------------------ ---------------------- -------------------
As of September 13, 2000 there were approximately 412 stockholders of
record of the common stock. The Company has never paid cash dividends on its
capital stock. The Company currently expects that it will retain its future
earnings for use in the operation and expansion of its business and does not
anticipate paying cash dividends in the foreseeable future.
On February 4, 2000, the Company announced a two-for-one stock split of
the Company's common shares. This was paid in the form of a 100% stock
distribution on March 27, 2000 to stockholders of record on March 2, 2000.
Accordingly, all share and per share data for the periods presented have been
restated to reflect the stock split.
During the quarter ended June 30, 2000, the Company issued an aggregate
of approximately 1,069,437 shares of its common stock in exchange for the
outstanding capital stock of the Montage Group, Ltd. and Avid Sports, Inc. The
shares were issued pursuant to an exemption by reason of Section 4(2) of the
Securities Act of 1933. These sales were made without general solicitation or
advertising. Each purchaser was an accredited investor or a sophisticated
investor (either alone or through its representative) with access to all
relevant information necessary.
ITEM 6. SELECTED FINANCIAL DATA
18
The following tables set forth selected consolidated financial data for
each of the years in the five-year period ended June 30, 2000. The consolidated
statements of operations data and balance sheet data are derived from the
consolidated financial statements of Pinnacle Systems, Inc. and its
subsidiaries, which have been audited by KPMG LLP, independent auditors. The
results for the fiscal year ended June 30, 2000 are not necessarily indicative
of the results for any future period. The selected consolidated financial data
set forth below should be read in conjunction with the consolidated financial
statements as of June 30, 2000 and 1999 and for each of the years in the three
year period ended June 30, 2000 and notes thereto set forth on Pages F-1 to F-27
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
(In thousands, except per share data)
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Net sales $ 237,967 $ 159,098 $ 105,296 $ 37,482 $ 46,151
Cost of sales 113,573 74,022 48,715 23,997 23,854
--------- --------- --------- --------- ---------
Gross profit 124,394 85,076 56,581 13,485 22,297
--------- --------- --------- --------- ---------
Operating expenses:
Engineering and product development 27,767 16,137 11,652 7,579 5,140
Sales and marketing 56,126 38,871 28,365 12,464 8,907
General and administrative 10,554 6,840 5,342 3,702 2,186
Legal settlement 2,102 -- --
Amortization of goodwill and other intangibles 18,382 2,289 936 203
In process research and development 3,500 6,579 16,960 4,894 3,991
--------- --------- --------- --------- ---------
Total operating expenses 118,431 70,716 63,255 28,842 20,224
--------- --------- --------- --------- ---------
Operating income (loss) 5,963 14,360 (6,674) (15,357) 2,073
Interest income, net 3,403 4,742 3,139 2,867 3,345
--------- --------- --------- --------- ---------
Income (loss) before income taxes 9,366 19,102 (3,535) (12,490) 5,418
Income tax expense (1,779) (666) (2,685) (2,445) (1,734)
--------- --------- --------- --------- ---------
Net income (loss) $ 7,587 $ 18,436 $ (6,220) $ (14,935) $ 3,684
========= ========= ========= ========= =========
Net income (loss) per share
Basic $ 0.16 $ 0.43 $ (0.17) $ (0.50) $ 0.13
========= ========= ========= ========= =========
Diluted $ 0.14 $ 0.39 $ (0.17) $ (0.50) $ 0.12
========= ========= ========= ========= =========
Shares used to compute net income (loss) per share
Basic 48,311 42,780 35,628 29,608 28,632
========= ========= ========= ========= =========
Diluted 55,442 46,966 35,628 29,608 31,212
========= ========= ========= ========= =========
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA: (In thousands)
Working capital $ 127,719 $ 120,325 $ 100,496 $ 57,662 $ 72,337
Total assets 322,799 196,469 132,937 70,007 84,561
Long-term debt -- -- 163 475 --
Retained earnings (accumulated deficit) 7,198 (389) (18,825) (12,605) 2,330
Shareholders' equity 259,620 166,259 114,392 62,711 80,198
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain Forward-Looking Information
Certain statements in this Management's Discussions and Analysis and
elsewhere in this Report on Form 10-K are forward-looking statements based on
current expectations, including each of the last sentence of "Gross Profit", the
last sentence of "Engineering and Product Development" and the last sentence of
"General and Administrative" under "Comparison of the Years Ended June 2000 and
1999" and the last sentence of the first paragraph under "Liquidity and Capital
Resources". These statements entail various risks and uncertainties that could
cause actual results to differ materially from those expressed in such
forward-looking statements. Such risks and uncertainties are set forth below
under "Factors Affecting Operating Results".
Overview
Pinnacle Systems Inc. (the "Company") is a leading supplier of video
authoring, storage, distribution and Internet streaming solutions for
broadcasters, business and professional "desktop" users, and consumers.
Pinnacle's products are used to create, store, and distribute video content from
television programs, TV commercials, pay-per-view, sports videos, corporate
films to home movies. Pinnacle's products are increasingly being used to stream
video over the Internet. Expanding distribution channels including cable
television, direct satellite broadcast, video-on-demand, digital video disks
(DVD) and the Internet have led to a rapid increase in demand for video content.
This increasing demand for content to supply new and existing is driving an
urgent need for affordable, easy-to-use video creation, storage, distribution
and streaming tools.
The Company's products use real time video processing and editing
technologies to apply a variety of video post-production and on-air functions to
multiple streams of live or recorded video material. These editing applications
include the addition of special effects, graphics and titles. To address the
broadcast market, the Company offers high performance, specialized computer
based solutions for high-end, production, post-production, team sports analysis,
broadcast on-air, and Internet streaming applications. For the desktop market,
the Company provides computer-based video editing and media creation products
and products used to create video content and solutions used to stream live and
recorded video over the Internet. To address the consumer market, the Company
offers low cost, easy to use video editing and viewing solutions that allow
consumers to view TV on their computer and to edit their home videos using a
personal computer, camcorder and VCR. Many of the Company's consumer products
enable users to create content that is suitable for the Internet.
Acquisitions
Avid Sports, Inc.
On June 30, 2000, the Company acquired all the outstanding common stock
of Avid Sports, Inc., a leading provider of sports editing and online sports
media management solutions ("ASports"). In connection with the acquisition,
Pinnacle issued 944,213 shares of its common stock valued at $22.7 million and
assumed 138,158 options valued at $1.9 million. Pinnacle also incurred
approximately $350,000 in transaction costs.
In September 2000, the Company agreed to issue additional stock to
certain former shareholders of ASports if the closing price of the Company's
Common stock does not equal or exceed $23 per share for four consecutive trading
days prior to May 31, 2001. If the share price does not reach this level, the
value of the additional shares to be issued shall be equal to 944,213 multiplied
by the difference between the average closing stock during the month of May 2001
and $23 per share.
20
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of ASports and the fair
market value of the acquired assets and liabilities assumed have been included
in the consolidated financial statements of the Company as of June 30, 2000. On
June 30, 2000, the Company recorded $5.8 million in tangible assets and $13.4
million in other identifiable intangibles including core/developed technology,
customer base and other intangibles, assumed $15.5 million in liabilities,
including $5.4 million in deferred taxes, and allocated $21.2 million to
goodwill. Goodwill represents the amount by which the cost of acquired net
assets exceeds the fair values of the net assets on the date of purchase.
Goodwill and identifiable intangibles are being amortized using the
straight-line method over five-year and three-year periods respectively.
Propel Ahead, Inc.
On June 30, 2000, the Company acquired all the outstanding common stock
of Propel Ahead, Inc. a provider of sports editing and online sports media
management solutions ("Propel"). In connection with the acquisition, Pinnacle
agreed to pay the former shareholder of Propel $3.2 million. Pinnacle also
incurred approximately $100,000 in transaction costs. The acquisition was
accounted for under the purchase method of accounting. Accordingly, the results
of operations of Propel and the fair market value of the acquired assets and
liabilities assumed have been included in the consolidated financial statements
of the Company as of June 30, 2000. On June 30, 2000, the Company recorded $0.1
million in tangible assets and $3.0 million in identifiable intangibles
including core/developed technology assumed $1.3 million in liabilities
including $1.2 million in deferred taxes, and allocated $1.5 million to
goodwill. Goodwill represents the amount by which the cost of acquired net
assets exceeds the fair values of the net assets on the date of purchase.
Goodwill and identifiable intangibles are being amortized using the
straight-line method over five-year and three-year periods respectively.
Montage Group, Ltd.
On April 7, 2000 the Company acquired all the outstanding common stock
of Montage Group, Ltd., a provider of networked non-linear editing solutions
("Montage"). In connection with the acquisition, Pinnacle issued 125,224 shares
of its common stock valued at $3.7 million ("initial payment") and incurred
approximately $325,000 in transaction costs. The terms of the acquisition also
included an earnout provision wherein the former shareholders of Montage could
receive additional consideration, net of the initial payment, upon achieving
certain gross margin levels for each year of a two-year period beginning April
7, 2000. Gross margins ranging between 40% to 50% of revenues would result in an
additional payout of between 100% to 150% of related revenues respectively.
However, in the second year of the earnout, assuming the 40% gross margin
threshold has been met, consideration will be paid only to the extent that the
second year earnout calculation exceeds that of the first year. No earnout
payment will be made in either year if gross margins do not exceed 40% of
revenues exclusively. Earnout payments, if any, will be paid in shares of the
Company's common stock.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Montage and the fair
market value of the acquired assets and assumed liabilities have been included
in the consolidated financial statements of the Company as of April 7, 2000. On
April 7, 2000, the Company recorded $2.8 million in tangible assets, $0.4
million in in-process research and development, $1.6 million in other
identifiable intangibles including core/developed technology and assumed $4.2
million in liabilities and allocated $3.5 million to goodwill. Goodwill
represents the amount by which the cost of acquired net assets exceeds the fair
values of the net assets on the date of purchase. Goodwill and identifiable
intangibles are being amortized using the straight-line method over five-year
and three-year periods, respectively.
21
Digital Editing Services, Inc.
On March 30, 2000 the Company acquired all the outstanding common stock
of Digital Editing Services, Inc., a provider of real-time video analysis and
database solutions ("DES"). In connection with the acquisition, Pinnacle paid
$300,000 in cash and issued 287,752 shares of its common stock valued at $9.1
million ("initial payment")and incurred $270,000 in transaction costs. The terms
of the acquisition include an earnout provision wherein the former shareholders
of DES could receive additional consideration, net of the initial payment, upon
achieving certain profitability levels for the one-year period ending March 30,
2001 ("earnout period"). Operating profits for DES ranging between 10% to 20% of
revenues would result in an additional payout of between 100% to 175% of those
associated revenues respectively. No earnout payment will be made if operating
profit does not exceed 10% of revenues during the earnout period. Any earnout
will be paid in shares of the Company's common stock.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of DES and the fair market
value of the acquired assets and assumed liabilities have been included in the
consolidated financial statements of the Company as of March 30, 2000. As of
March 30, 2000, the Company recorded $1.8 million in tangible assets, $0.5
million in in-process research and development, and $8.2 million in other
identifiable intangibles including core/developed technology assumed $4.6
million in liabilities, including $3.3 million in deferred taxes, and allocated
$3.8 million to goodwill. Goodwill represents the amount by which the cost of
acquired net assets exceeds the fair values of the net assets on the date of
purchase. Goodwill and identifiable intangibles are being amortized using the
straight-line method over five-year and three-year periods, respectively.
Puffin Designs, Inc.
On March 24, 2000, the Company acquired all the outstanding common
stock of Puffin Designs, Inc., a provider of content creation solutions
("Puffin"). In connection with the acquisition, Pinnacle issued 360,352 shares
of its common stock valued at $11.2 million. In addition, Pinnacle assumed
outstanding stock options and warrants representing 51,884 and 4,155 shares of
stock respectively and valued at $336,000.
The acquisition has been accounted for under the purchase method of
accounting. Accordingly, the results of operations of Puffin and the fair market
value of the acquired assets and assumed liabilities have been included in the
consolidated financial statements of the Company as of March 24, 2000. As of
March 24, 2000, the Company recorded $0.5 million in tangible assets, $0.6
million in-process research and development, $1.2 million in identifiable
intangibles including core/developed technology assumed $1.7 million in
liabilities and allocated $11.2 million to goodwill. Goodwill represents the
amount by which the cost of acquired net assets exceeds the fair values of the
net assets on the date of purchase. Goodwill and identifiable intangibles are
being amortized using the straight-line method over five-year and three-year
periods, respectively.
Synergy, Inc.
On January 11, 2000, the Company acquired all the outstanding common
stock of Synergy, Inc. makers of the popular, award-winning Hollywood FX
software for video content creation applications ("Synergy"). In connection with
the acquisition, Pinnacle paid Synergy $200,000. The acquisition was accounted
for under the purchase method of accounting. Accordingly, the results of
operations of Synergy and the fair market value of the acquired assets and
liabilities assumed have been
22
included in the financial statements of the Company as of January 11, 2000.
Goodwill of $233,500 is being amortized using the straight-line method over a
five-year period.
Video Communications Division of Hewlett Packard
On August 2, 1999, the Company completed the purchase of the Video
Communications Division ("VID") of the Hewlett-Packard Company ("HP"). Under the
terms of an asset purchase agreement dated June 30, 1999, Pinnacle Systems
acquired substantially all of the assets of HP's VID, including key technologies
and intellectual property, the MediaStream family of products and selected
additional assets, as well as most managers and employees. In consideration,
Pinnacle paid HP $12.6 million in cash and issued 1,546,344 shares of its common
stock valued at $20.6 million. The Company incurred acquisition costs of
approximately $0.5 million for a total purchase price of $33.6 million and
assumed liabilities totaling $10.1 million.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of VID and the fair market
value of the acquired assets and assumed liabilities have been included in the
financial statements of the Company as of August 2, 1999. As of August 2, 1999,
the Company recorded $7.3 million in tangible assets, $2.0 million in in-process
research and development, $19.1 million in other identifiable intangibles
including core/developed technology, customer base, trademarks, favorable
contracts and assembled workforce, assumed $10.1 million in liabilities and
allocated $15.4 million to goodwill. Goodwill represents the amount by which the
cost of acquired net assets exceeds the fair values of the net assets on the
date of purchase. Goodwill and other intangibles are being amortized using the
straight-line method over periods ranging from nine months to five years.
Broadcast Market
The broadcast market generally requires very high technical performance
such as real time 10-bit processing, control of multiple channels of live video
and specialized filtering and interpolation. From the Company's inception in
1986 until 1994, substantially all of the Company's revenues were derived from
the sale of products into the broadcast market. Currently, DVExtreme, Lightning,
the Deko line and Thunder and Media stream servers comprise the Company's suite
of high performance real time products designed for on-air, broadcast and
high-end, post-production applications.
In 1997, the Company commenced shipment of DVExtreme and Lightning. In
the same year, the Company also completed the acquisition of the Deko titling
and character generation product line from Digital Graphix, Inc. Currently the
Company sells three products in the Deko line, FXDeko, which began shipping in
September 1999, TypeDeko and WriteDeko and has recently announced additional
products including FXDekoHD, a high definition character and graphics generator,
HDDeko500, a real-time high definition character generator, and ClipDeko, an
integrated clip option for the Company's complete line of character generators.
In March 2000, the Company began shipping Rocket for FXDEko, a template-based
tool that allows the generation of real-time 3D elements that can be
automatically updated by live data streams.
In June 1999, the Company introduced Thunder, the Company's first
multi-channel video and audio clip server and iThunder, a real time video server
for Internet broadcasting. In August 1999, the Company completed the acquisition
of VID from HP including the Media Stream server family. Media Stream
compliments the Thunder family in providing a complete line of broadcast quality
video server solutions. In February 2000, the Company introduced MediaStream
300, the newest member of the MediaStream family. The MediaStream 300 offers the
high-quality, reliable playback and the
23
comprehensive networking needed by today's broadcasters in an extremely compact,
two-rack-unit package that is more affordable and more space efficient than
previous MediaStream servers.
On April 7, 2000, Pinnacle announced the acquisitions of DES a provider
of real-time video analysis and database solutions, and Montage, a provider of
networked non-linear editing solutions. On June 30, 2000 the Company announced
the acquisition of ASports, a leading provider of sports editing and online
sports media management solutions. VorteXNews(TM) from Montage, gives users the
ability to ingest, edit, store, broadcast and stream to the Internet live news
and sports content entirely in the digital domain. The video solutions from
ASports and DES have been chosen by many leading professional and college teams
for their video server and image database needs. These newly acquired companies
are expected to form the basis of Pinnacle's new Totally Networked News(TM)
solutions family to create powerful and comprehensive media management, editing
and streaming solutions for broadcasters and sports organizations.
The broadcast market accounted for approximately 36.0%, 16.9% and 24.2%
of net sales in the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
Desktop Market
The Company's desktop products are designed to provide high quality
video capture, compression and decompression, editing and real time video
manipulation capabilities for computer based video post-production systems. They
are generally offered at significantly lower price points than equipment
included in traditional editing suites and are integrated into the computer by a
value-added reseller, an OEM, or the end user. The Company traditionally has had
two general classes of desktop products - digital video effects products and
video capture and editing products. In January 2000, Pinnacle announced the
formation of its new webcasting solutions business within its desktop products
group, emphasizing the Company's drive to introduce a suite of solutions for the
internet media-streaming marketplace.
Digital video effects products which include the Alladin and Genie
product families were released in 1994 and 1996 respectively. The Company's
class of video capture and editing products, including ReelTime, ReelTime Nitro,
miroVIDEO DC30, miroVIDEO DC50, miroVIDEO DV300/200 families and the TARGA
family. In June 1999, the Company began shipping DC1000, a dual stream MPEG2
editing product and a companion DVD authoring option and in July 1999 began
shipping the companion product DVD1000, which adds the capability to author
fully featured DVD titles. In December 1999, the Company began shipping DV500, a
complete real-time, dual-stream, digital video production system based on the
industry standard DV (IEEE 1394 or Firewire) format, providing customers with a
native DV editing environment. In January 2000, Pinnacle acquired Synergy,
makers of Hollywood FX software for video content creation applications.
Hollywood FX products are currently being bundled with Pinnacle's DV500 or sold
separately. In March 2000, the Company acquired Puffin a provider of content
creation solutions. Puffin has developed and sells an advanced set of software
tools for real-time paint, rotoscoping and visual motion tracking. In June 2000,
the Company began shipping Commotion 3.0 and TARGA 3000. Commotion 3.0,
developed by Puffin, is an all-in-one solution that combines the power of the
paintbrush with intuitive composting and effects tools to deliver superior
performance on the desktop. TARGA 3000 is the Company's newest content creation
and streaming platform. TARGA 3000 allows users to choose processing in DV,
MPEG-2 or true uncompressed digital 601 format, and even lets them mix these
formats on a single timeline. The system delivers three real-time uncompressed
video streams, plus five real-time graphics streams simultaneously.
For its class of webcasting solutions, in December 1999, the Company
announced StreamGenie, a new portable Web casting solution for streaming live
video programming over the Internet. The
24
Company began shipping StreamGenie in June 2000. In March 2000, the Company
announced the StreamFactory(TM) Web Media Encoder that targets Internet
broadcasters who require real-time web encoding of live or previously produced
content.
The desktop market accounted for approximately 42.7%, 56.5% and 57.5%
of net sales in the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
Consumer Market
The Company's consumer products provide complete video editing
solutions that allow consumers to edit their home videos using their personal
computer (PC), camcorder and VCR. In addition, the Company recently announced a
solution for capturing, editing and sharing video over the Internet. The Company
also sells a product line that allows consumers to watch TV, listen to FM radio
and create their own videos on a PC. As of June 30, 2000, the Company's consumer
product line included Studio DC10, Studio MP10, Studio PCTV and PCTV USB, and
Studio DV. The Company began shipping Studio DV in September 1999. Studio DV
enables consumers to edit and create high-quality digital videos right on their
PC by taking input directly from DV camcorders. In November 1999, the Company
began shipping the USB version of its Studio PCTV, a device that lets consumers
watch TV, listen to FM radio and create their own videos on a PC.
Consumer products are distributed directly to retail outlets and
through retail distributors such as Ingram Micro. The Company also sells
directly to end-users by accepting orders via the telephone and Internet. Price
points of consumer products are lower than the Company's broadcast and desktop
products and consumer products are marketed as computer peripheral products. The
consumer market accounted for approximately 21.3%, 26.6% and 18.3% of net sales
in the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
Results of Operations
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data as a percentage of net sales:
Fiscal Years Ended June 30,
---------------------------
2000 1999 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 47.7 46.5 46.3
------ ------ ------
Gross profit 52.3 53.5 53.7
Operating expenses:
Engineering and product development 11.7 10.1 11.1
Sales and marketing 23.6 24.4 26.9
General and administrative 4.4 4.3 5.1
Legal settlement 0.9 - -
Amortization of goodwill and other intangibles 7.7 1.5 0.9
In-process research and development 1.5 4.1 16.1
------ ------ ------
Total operating expenses 49.8 44.4 60.1
------ ------ ------
Operating income (loss) 2.5 9.1 (6.4)
Interest income, net 1.4 3.0 3.0
------ ------ ------
Income (loss) before income taxes 3.9 12.1 (3.4)
Income tax expense 0.7 0.4 2.5
------ ------ ------
Net income (loss) 3.2% 11.7% (5.9)%
====== ====== ======
25
The tables below include sales data by business group:
Net Sales
Fiscal Years Ended June 30, '00 - '99 '99 - '98
Group 2000 1999 1998 % Change % Change
- ----- ---- ---- ---- -------- --------
Broadcast $ 85,618 $ 26,917 $ 25,521 218.1% 5.5%
Desktop 101,698 89,798 60,335 13.3% 48.8%
Consumer 50,651 42,383 19,440 19.5% 118.0%
-------- -------- -------- ---- ----
$237,967 $159,098 $105,296 49.6% 51.1%
======== ======== ======== ==== ====
Sales Percentages
Group 2000 1999 1998
- ----- ---- ---- ----
Broadcast 36.0% 16.9% 24.2%
Desktop 42.7% 56.5% 57.5%
Consumer 21.3% 26.6% 18.3%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
Comparison of the Years Ended June 30, 2000 and 1999
Net Sales. Net sales increased in all three product groups in the
fiscal year ended June 30, 2000, compared to fiscal 1999. Broadcast sales
increased 218.1% primarily due to the sale of products obtained through
acquisition. These included the sale of MediaStream products acquired from
Hewlett-Packard and from sports and news solutions acquired from DES, Asports,
and Montage. In the desktop group, sales increased 13.3% in the fiscal year
ended June 30, 2000, over fiscal 1999. Sales of new generation products such as
DV500 and DC1000 plus the sale of TARGA products acquired from Truevision, Inc.
in March 1999 more than compensated for a decrease in sales of DC30, DV300, DC50
and Reel-time. In the consumer group, sales increased 19.5% in the fiscal year
ended June 30, 2000 over fiscal 1999. Decreased sales of Studio 400 were offset
by sales of newer products such as Studio DV, Studio USB1 and Studio MP10.
International sales (sales outside of North America) increased 35.4% in
the fiscal year ended June 30, 2000 and accounted for approximately 55.0% and
60.8% of the Company's net sales in fiscal 2000 and 1999, respectively. The
increase in absolute sales in fiscal 2000 was derived primarily from increased
sales into the United Kingdom and the Asia Pacific regions. Sales into
continental Europe also increased. As a percentage of Pinnacle's total net
sales, international sales decreased primarily due to an increase in domestic
sales from the broadcast group. The Company expects that international sales
will continue to represent a significant portion of its total net sales.
Gross Profit. Pinnacle distributes and sells its products to end users
through the combination of independent domestic and international dealers and
value added resellers ("VARs"), retail distributors, OEMs and, to a lesser
extent, a direct sales force. Sales to dealers, VARs, distributors and OEMs are
generally at a discount to the published list prices. The amount of discount,
and consequently, the Company's gross profit, varies depending on the product,
the channel of distribution, the volume of product purchased, and other factors.
Cost of sales consists primarily of costs
26
related to the procurement of components and subassemblies, labor and
overhead associated with procurement, assembly and testing of finished products,
inventory management, warehousing, shipping, warranty costs, royalties,
provisions for obsolescence and shrinkage. In the fiscal year ended June 30,
2000, total gross profit decreased to 52.3% from 53.5% in the fiscal year ended
June 30, 1999. While broadcast margins increased slightly from year to year,
desktop margin dropped to 52.5% from 59.5% in the fiscal years ended June 30,
2000 and 1999, respectively. The drop in desktop margin was primarily due to a
change in product mix. Broadcast margins increased slightly due to a favorable
product mix which included sales of Media Stream products. Consumer margins for
the fiscal year ended June 30, 2000 were generally unchanged from fiscal 1999.
The Company has experienced and expects to continue to experience pricing
pressures on its products as the industry matures and competition increases.
Engineering and Product Development. Engineering and product
development expenses include costs associated with the development of new
products and enhancements of existing products and consist primarily of employee
salaries and benefits, prototype and development expenses, depreciation and
facility costs. Engineering and product development expenses increased 72.1% to
$27.8 million in the fiscal year ended June 30, 2000 from $16.1 million in
fiscal 1999. As a percentage of sales, engineering and product development
expenses were 11.7% in the fiscal year ended June 30, 2000 versus 10.1% in
fiscal 1999. The increase was due primarily to the personnel hired in connection
with the HP and Truevision acquisitions which occurred in August 1999 and March
1999, respectively. Pinnacle believes that investment in research and
development is crucial to its future growth and position in the industry. In
addition to the Company's recent acquisitions which added research and
development facilities in Orlando, Florida (DES), New York City (Montage), and
Lowell Massachusetts (ASports), the Company expects to continue to allocate
significant resources to all of its engineering and product development
locations including Mountain View, Grass Valley and Sausalito, California;
Paramus, New Jersey; Gainesville, Florida; Braunschweig, Germany; Indianapolis,
Indiana and Salt Lake City, Utah.
Sales and Marketing. Sales and marketing expenses include compensation
and benefits for sales and marketing personnel, commissions, travel, advertising
and promotional expenses including channel marketing funds and trade shows, and
professional fees for marketing services. Sales and marketing expenses increased
44.4% to $56.1 million in the fiscal year ended June 30, 2000 from $38.9 million
last fiscal year. These increases reflect expenditures to achieve the Company's
goal of increased sales and market share and expanded product awareness. Sales
and marketing expenses also increased due to acquisitions, notably the video
communications division of Hewlett Packard, expanded operations in Japan and new
expenditures in connection with product releases. Although sales and marketing
expenditures increased significantly year to year, as a percentage of net sales,
expenditures dropped to 23.6% in fiscal 2000 from 24.4% in fiscal 1999. This
decrease reflects a growth in sales exceeding incremental sales and marketing
expenditures.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits for administrative, executive, finance and
MIS personnel, occupancy costs and other corporate administrative expenses.
General and administrative expenses increased 54.3% to $10.6 million in the
fiscal year ended June 30, 2000 from $6.8 million in the fiscal year ended June
30, 1999. As a percentage of total revenue, general and administrative expenses
were 4.4% and 4.3% in the fiscal years ended June 30, 2000 and 1999,
respectively. The increase in the absolute dollar amount of general and
administrative expenses was primarily due to increased investment necessary to
manage and support the Company's increased scale of operations. These included
staffing and associated benefits, non-capitalized expenses related to the
Company's new SAP information system, and legal and professional fees. The
Company anticipates that for the near future, its general and administrative
expenses, excluding the legal settlement, as a percentage of net sales, should
remain at approximately the same percentage as in fiscal 2000.
In-Process Research and Development. During the year ended June 30,
2000, the Company recorded an in-process research and development charge of
approximately $3.5 million mostly related to the acquisitions of the VID from
HP, Puffin, DES and Montage. During the year ended June 30, 1999, the
27
Company recorded an in-process research and development charge of approximately
$6.6 million mostly related to the Truevision acquisition.
The amounts charged to in-process research and development were based
on results of independent appraisals using established valuation techniques in
the high-technology industry. The portion of the purchase price allocated to
in-process research and development represents development projects that have
not yet reached technological feasibility and have no alternative future use.
Technological feasibility was determined based on: (i) an evaluation of the
product's status in the development process with respect to utilization and
contribution of the individual products as of the date of valuation and (ii) the
expected dates in which the products would be commercialized. It was determined
that technological feasibility was achieved when a product reached beta stage.
The values assigned to purchased in-process research and development were
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products; estimating the resulting net
cash flows from such projects; discounting the net cash flows back to the time
of acquisition using a risk-adjusted discount rate and then applying an
attribution rate based on the estimated percent complete considering the
approximate stage of completion of the in-process technology at the date of
acquisition. A discount and attribution rate of 35% was used in the VID
valuation and a 30% rate was used on the valuations of Puffin, DES and Montage.
Amortization of Acquisition - Related Intangible Assets. Amortization
of acquisition related intangibles consists of amortization of goodwill and
identifiable intangibles including core/developed technology, customer base,
trademarks, favorable contracts and assembled workforce amongst others. These
assets are being amortized using the straight-line method over periods ranging
from nine-months to nine years. The amortization increased from $2.3 million in
the fiscal year ended June 30, 1999 to $18.4 million in the year ended June 30,
2000. This increase is due primarily to the amortization of goodwill and other
intangibles acquired in the Truevision and VID acquisitions March and August
1999, respectively.
Interest Income, net. Net interest income and other consists primarily
of interest income generated from the Company's low risk investments in money
market funds, government securities and high-grade commercial paper. In the
fiscal year ended June 30, 2000, interest income decreased approximately 28.2%
to $3.4 million from $4.7 million in fiscal 1999. The decrease reflects a
reduction in the Company's cash and marketable securities due to an acquisition
payment of $12.6 million paid to HP in August 1999. In addition, positive cash
flows generated from Pinnacle's foreign operations and invested overseas obtain
lower interest yields than investments made domestically.
Income Tax Expense. Income taxes are comprised of federal, state and
foreign income taxes. The Company recorded provisions for income taxes of $1.8
million and $0.7 million for the fiscal years ended 2000 and 1999, respectively.
The provision for income taxes as a percentage of pretax income was 19% and
3.5%, respectively. The tax rates in both fiscal years ended 2000 and 1999 are
lower than the statutory tax rate mainly due to the reduction of the Company's
valuation allowance. The tax rate in fiscal year 1999 was significantly lower
than the rate in fiscal year 2000 as a larger portion of valuation allowance was
written down during fiscal 1999. The tax rate in fiscal year 2000 was also
increased by nondeductible in-process R&D and goodwill amortization as a result
of various acquisitions during the year. The total valuation allowance was $9.3
million and $6.2 million as of June 30, 2000 and 1999, respectively.
As of June 30, 2000, the Company had federal and state net operating
loss carryforwards of approximately $13.9 million and $5.7 million ,
respectively. The Company's federal net operating loss carryforwards expire in
the years 2012 through 2020, if not utilized. The Company's state net operating
loss expires in the years 2002 through 2005, if not utilized. In addition, the
Company had federal research and experimentation credit carryforwards of $3.1
million which expire in the years 2001 through 2020, and state research and
experimentation credit carryforwards of $2.3 million which have no expiration
provision.
28
Comparison of the Years Ended June 30, 1999 and 1998
Net Sales. The Company's net sales increased 51.1% to $159.1 million in
fiscal 1999 from $105.3 million in fiscal 1998. The increase is primarily
attributable to increases in desktop and consumer product sales. Broadcast sales
increased slightly and were augmented by the release of Thunder and FXDeko.
Desktop sales in fiscal 1999 increased 48.8% over fiscal 1998. This was driven
primarily by increased sales from existing products including the DC30, DC50,
Reeltime and DV300 in addition to sales generated from new product releases
notably the DC1000. Desktop sales also increased due to the acquisition of
Truevision in March 1999 which added the TARGA and Ready-to-Edit products.
Consumer sales increased 118.0% due to a full year of sales of the Studio 400
which was released at the end of fiscal 1998. Consumer sales also grew due to
increased sales of PCTV and the introduction of Studio DC10 and Studio MP10.
International Sales (sales outside of North America) were approximately
60.8% and 57.6% of the Company's net sales in fiscal 1999 and 1998,
respectively. The increase in fiscal 1999 was primarily attributable to an
increase in European sales of consumer products. The Company expects that
international sales will continue to represent a significant portion of its net
sales.
Gross Profit.